On Gold Stocks During a Double-Dip Recession

| About: VanEck Vectors (GDX)
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  • I’m calling it: we’re in a double-dip recession
  • Gold stocks up 400% during this recession
  • My favorite low-cost gold producer

I’m going to write today’s issue under the rash assumption that we’re already experiencing a double dip recession. I think such a recession has important implications for gold and gold investments, for the simple fact that severe downward trends in the broad market usually have deleterious effects on every asset class - at least for the short term.

If it happens again, we’ll get another great opportunity to load up on gold stocks as they get temporarily dragged to hell by the broad market.

So, before I tell you what to look for, here’s my brief reasoning for why I think we’re in a double-dip recession.

Q2 of 2010 is in the books, and the broad market is down nearly 12% over that 3 month period. I’m using the S&P 500 as a proxy for GDP. Typically, stocks in the S&P 500 are a leading indicator for GDP, so it’s not a perfect system, but it’s good enough for today's discussion.

I know - the usual definition of a recession is: “a decline in GDP for two consecutive quarters” - but if you look at a chart of the S&P 500 over the past two quarters, that definition is small consolation:

The criticism of that definition is that it’s backward looking. “We won’t know we were in a recession today until we can look at the numbers 6 months later” just seems like a lazy, Pollyanna excuse.

I’m not a market cheerleader, nor am I a doomsayer - but there are few bright lights in the market today, save one - gold. A significant part of my larger investment thesis is that gold is a safe investment vehicle when every other vehicle has crashed and is burning.

Check out the chart below to see how gold investments have lived up to my thesis recently:

This chart plots the performance of the Market Vectors Gold Miners ETF (NYSE: GDX) which holds the biggest publicly traded gold stocks in the market (in red) against the S&P 500 (in blue) for Q2 2010.

The outperformance of GDX is pretty impressive - but look at the long-term effects of a secular bear market on gold stocks; here is a performance chart showing the same thing - GDX vs. the S&P 500 since January 1999.

You’ll note the huge dip in GDX at the end of 2008. That was the beginning of the recession in the broad market, and it represented a great opportunity to buy gold stocks.

For months I’ve urged you to buy gold stocks - and I certainly haven’t changed my opinion. But if I’m right, and we’re in the midst of the double-dip, then you should look for any weakness in your favorite gold stocks as a time to buy.

Now, I don’t know for sure if gold stocks will get slaughtered along with the broad market like they were in late 2008/early 2009 - but it’s something to look for.

In the meantime, you should be averaging into these gold stocks - and the GDX ETF is one great way to do so.

That’s because while gold sells near its all time highs, gold stocks are still playing catch-up. That increased profit capacity from higher priced gold hasn’t hit their bottom lines - yet.

Gold mining stocks typically magnify gains made in gold’s price, and right now they’re still cheap on that basis. Even if we don’t get another great buying opportunity, I still expect many gold stocks to double in the next 12-18 months. Buying these companies today gives you exposure to the increased earnings power of companies that can mine gold for much less than the spot price.

Disclosure: None